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NCERT Solution (Part - 1) - Cash Flow Statement | Accountancy Class 12 - Commerce PDF Download

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Short Question:

Question 1: What is a Cash Flow Statement?
Answer: A Cash Flow Statement is a statement showing inflows and outflows of cash and cash equivalents from operating, investing and financing activities of a company during a particular period. It explains the reasons of receipts and payments in cash and change in cash balances during an accounting year in a company.

Question 2: How are the various activities classified (as per AS-3 revised) while preparing cash flow statement?
Answer: As per the Revised Accounting Standard 3 (AS-3), preparation of Cash Flow Statement for each period is mandatory. AS-3 also specifies the classification of all inflows and outflows basically under the following heads:
1. Cash Flow from Operating Activities
2. Cash Flow from Investing Activities
3. Cash Flow from Financing Activities

Question 3:  State the uses of cash flow statement?
Answer: The uses of cash flow statement are as follows:
1. It is useful for short term financial planning about inflows and outflow of cash.
2. It helps in analysing the reason for the change in cash and cash equivalent balances of a company
3. It assists in determining and assessing liquidity and solvency positions of a company.
4. It enables to analyse and study the trends of receipts and payments of cash from various activities of a company and thereby helps in drafting various policy measures and short term planning.
5. It enables the segregation of cash flows from operating, investing and financing activities of the business separately.
6. It assists in making decision about distribution of profit with reference to the availability of cash.

Question 4: What are the objectives of preparing cash flow statement?
Answer: The important objectives for preparing Cash Flow Statement are as follows:
1. The most important objective that is fulfilled by preparing Cash Flow Statement is to ascertain the gross inflows and outflows of cash and cash equivalents from various activities.
2. Secondly, Cash Flow Statement helps in analysing various reasons responsible for change in the cash balances during an accounting year.
3. This statement helps in analysing and understanding the liquidity and solvency of a company , thereby, depicting the true liquidity position to the creditors and the investors.
4. Cash Flow Statement also helps in ascertaining the requirement and availability of cash in near future.

Question 5: State the meaning of the terms : Cash Equivalents, Cash flows.
Answer: Cash equivalents are short term, highly liquid investments that are easily convertible into cash and which are subject to an insignificant risk of change in value. In other words, cash equivalents are held for the purpose of meeting short term cash commitments rather than for investment or any other purpose. An investment held for short-term maturity, say three months can be regarded as cash equivalent. Some examples of cash equivalents are treasury bills, commercial papers, etc. On the other hand, cash flows are inflows and outflows of cash and cash equivalents. A cash inflow results in increase in the total cash balance and a cash outflow results in decrease in the total cash balance.

Question 6: Prepare a format of cash flow from operating activities under_*_ and indirect method.
* Preapre Cash Flow from Operating Activities using both the methods i.e. Direct and Indirect Method.
Answer: The format of cash flow from operating activities is as follows:

Direct Method

Cash Flow from Operating Activities:

 

Cash receipts from customers

***

Cash paid to suppliers and employers

(***)

Cash generated from operations

***

Income tax paid

(***)

Cash flow before extraordinary items

***

+/– Extraordinary items

***

Net Cash from operating activities

***

 

Indirect Method

Cash Flow from Operating Activities:

 

 

Net Profit before tax and extraordinary items

 

***

 

Add:

Non-Cash Expenses and Non-Operating Expenses

 

 

 

 

Depreciation

**

 

 

 

Goodwill

**

 

 

 

Interest paid

**

 

 

 

Loss on sale of fixed assets

**

 

 

 

Foreign exchange

**

**

 

Less:

Non Operating Incomes.

 

 

 

 

Dividend received

**

 

 

 

Profit on sale of fixed assets

**

 

 

 

Interest received

**

**

Operating profit before working capital changes

 

***

 

Add: Decrease in Current Assets

***

 

 

 

Increase in Current Liabilities

***

***

 

Less: Increase in Current Assets

***

 

 

 

Decrease in Current Liabilities

***

***

Cash generated from Operating Activities

 

***

Income tax paid

 

***

Cash Flow before Extraordinary Items

 

***

 

Add/Less: Extra ordinary Items

 

***

Net Cash Flow from Operating Activities

 

***

 

 

 

Note: Preparation of Cash Flow Statement using Direct Method has been excluded from the prescribed syllabus. The format is given since the question has not specified the method explicitly. Students can refer to the direct method for the knowledge purpose.

Question 7: State clearly what would constitute the operating activities for the following types of enterprises:
(i) Hotel
(ii) Film production house
(iii) Financial enterprise
(iv) Media enterprise
(v) Steel manufacturing unit
(vi) Software development business unit
Answer:
(i) Hotels
1. Receipts from sale of goods to customer.
2. Payment of wages and salaries, electricity, food items and other items used in accommodation.
(ii) Film Production House:
1. Receipts from selling film rights of a film to the distributors.
2. Payment to the staff, actors, actresses, directors, etc.
(iii) Financial Enterprises:
1. Receipts from repayment of loans, interest incomes from investments, etc.
2. Repayment of loans, recovery expenditure for recover of loans etc, salaries of employees.
(iv) Media Enterprises:
1. Receipts from advertisements.
2. Payments to staff, reporters, photographers, etc.
(v) Steel Manufacturing Unit:
1. Receipts from sale of steel sheets, steel castings, steel rods, etc.
2. Payment for iron, coal, salaries to staff, etc.
(vi) Software Business Unit:
1. Receipts from sale of software and renewal of licenses.
2. Payment of salaries to their employees, etc.

Question 8: “The nature/type of enterprise can change altogether the category into which a particular activity may be classified.” Do you agree? Illustrate your answer.
Answer: Yes, the nature or type of an enterprise can change the category into which a particular activity may be classified. This can be better understood with the help of an example of two firms. One engaged in financial services and the other engaged in manufacturing services. For the firm that is engaged in financial services, interests received or paid are classified under operating activities whereas for the firm that is engaged in manufacturing business, interests paid are classified under financing activities and interest received as investing activities. Therefore, the classification of activities depends on the nature and type of enterprise.

The document NCERT Solution (Part - 1) - Cash Flow Statement | Accountancy Class 12 - Commerce is a part of the Commerce Course Accountancy Class 12.
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FAQs on NCERT Solution (Part - 1) - Cash Flow Statement - Accountancy Class 12 - Commerce

1. What is a cash flow statement and why is it important in financial analysis?
Ans. A cash flow statement is a financial statement that provides information about the cash inflows and outflows of a company over a specific period. It helps in analyzing the liquidity and financial health of the company by showing how it generates and uses cash. It is important in financial analysis as it enables investors and stakeholders to understand the cash position of the company, its ability to meet short-term obligations, and its capacity for future growth.
2. How is a cash flow statement different from an income statement?
Ans. While both cash flow statement and income statement are important financial statements, they have different purposes. An income statement shows the company's revenues, expenses, and net income or loss over a specific period. It focuses on the company's profitability. On the other hand, a cash flow statement focuses on the cash inflows and outflows, including operating activities, investing activities, and financing activities. It provides information on the sources and uses of cash, helping to assess the company's liquidity and cash management.
3. What are the three main sections of a cash flow statement?
Ans. The three main sections of a cash flow statement are: 1. Operating activities: This section includes cash flows from the company's primary business operations, such as sales and expenses. It shows the cash generated or used by the company's core operations. 2. Investing activities: This section includes cash flows related to the purchase or sale of long-term assets, such as property, plant, and equipment, as well as investments in other companies or securities. 3. Financing activities: This section includes cash flows related to the company's financing activities, such as issuing or repurchasing stocks, issuing or repaying debt, and payment of dividends. It shows how the company raises and uses funds from external sources.
4. How can a cash flow statement help in assessing a company's financial health?
Ans. A cash flow statement helps in assessing a company's financial health in several ways: 1. Liquidity assessment: By analyzing the cash flows from operating activities, investors can determine if the company has enough cash to meet its short-term obligations. This provides insights into the company's liquidity position. 2. Cash management: The cash flow statement helps in evaluating the company's cash management practices. It shows how effectively the company is managing its cash inflows and outflows, indicating its ability to generate and use cash efficiently. 3. Investment analysis: By examining the cash flows from investing activities, investors can understand the company's investment decisions and strategies. It provides information on the company's capital expenditures and potential for future growth. 4. Financing analysis: The cash flow statement reveals how the company raises and uses funds from external sources. It helps in assessing the company's financial structure, debt repayment capability, and dividend payments to shareholders.
5. What are some limitations of a cash flow statement?
Ans. While a cash flow statement is a valuable tool for financial analysis, it has certain limitations: 1. Non-cash transactions: The statement does not include non-cash transactions, such as depreciation and amortization expenses. These transactions can impact the company's profitability and financial health but are not reflected in the cash flow statement. 2. Timing of cash flows: The statement provides information about cash flows during a specific period, which may not capture the timing of cash inflows and outflows accurately. It is important to consider the timing of cash flows when analyzing the company's financial health. 3. Lack of detail: The statement provides aggregated information about cash flows from operating, investing, and financing activities. It may not provide a detailed breakdown of individual cash inflows and outflows, limiting the analysis. 4. Manipulation potential: Companies can manipulate cash flow statement by timing cash flows, classifying activities in a different section, or using accounting techniques to present a better financial position. It is important to consider other financial statements and disclosures for a comprehensive analysis.
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